Why You Should Think Twice About Investing In Potash & Phosphate Now

Why You Should Think Twice About Investing In Potash & Phosphate Now

Today, we’ll discuss potash and phosphate producers as the world will be needing more fertilizers.

The demand for both fertilizers is expected to grow by 20% over the next 5 years.

Unfortunately, investing isn’t as positive as the demand trend.

Introduction

Lately, I’ve been discussing how the agriculture sector looks interesting and should be a part of a well-diversified portfolio.

One part of investing in agriculture is investing in fertilizers. Today, we are going to discuss whether an investment in potash and phosphate is a smart idea. Related companies are Nutrien (NYSE: NTR), Mosaic Company (NYSE: MOS), Intrepid Potash (NYSE: IPI), and Sociedad Quimica (NYSE: SQM). When you analyze such companies, the first thing you look at is the outlook for the product. If interesting, keep going. If not, look for other investments.

The Outlook For Potash

If you look at what potash producers have to say, their outlook is positive but if you are a corporate manager, you have to be positive.

Producers expect that global population growth and the growth of the middle class will significantly increase demand for food and, consequently, demand for fertilizers. CRU estimates potash shipments to grow by 20% in the next 5 years.

There isn’t much to argue with there as, apart from short term volatility, long term trends aren’t that difficult to predict. So the focus shifts to supply. If there is more demand than supply, prices will surge and so will profits but if there is more supply than demand, we could see a painful decade for potash producers.

The problem is that as demand grows, so will supply. The amount of potash in the ground isn’t limited and therefore if prices increase, so will supply. Further, global producers can increase their operating rate and increase production if needed. Many companies have idled their higher cost plants which can be quickly reopened if necessary.

Figure 2: Potash producers can increase their production if necessary. Source: Mosaic.

Further, apart from the potential supply coming from idled mines, there is always the threat coming from new projects.

An example is BHP’s (NYSE: BHP) Jansen Project in Canada which is expected to cost about $14 billion and BHP has already spent $3.8 billion. It was recently delayed, but the project could produce eight million tons of marketable potash annually at full capacity which would almost cover the total expected increase in demand for potash in the next five years. Other examples of potential potash production come from all over the world, the Belaruskali Petrikovsky project could add 3 million tons while the Danakil project in Ethiopia could add another 2 million tons, and these are just two examples. In 2017 alone, two greenfield projects started up, the 1.4 million ton project in Turkmenistan and the 2 million ton project of K+S in Saskatchewan.

The above means that there is a possible Armageddon coming in the potash field and therefore it doesn’t really pay to be invested. Perhaps potash prices will remain flat, as has been the case in the past. But anchoring one’s expectations to the prices reached in the 2008 to 2012 period might not be the best idea as the period looks more like an outlier than an historical mean.

As for future supply, the Ma’aden Wa’ad al Shamal Phosphate Company from Saudi Arabia is expected to produce 16 million tons per year when full production occurs. Further, the Jorf Lasfar Phosphate Hub in Morocco will enable production to go from the current 3 million tons to 13 million tons.

Conclusion

Everything I’ve written about above leads me to conclude that there won’t be any more 2008 – 2012 situations. Therefore, the only option to invest is to take advantage of short term trends and seasonality which is always strong in the fertilizer sector.

Further, when prices are stable at a lower level and stocks a cheap with mixed profitability, it might be smart to invest in a company that has a price to earnings ratio around 10 and a strong dividend. This should be the lowest cost producer. Such a strategy will limit your downside and give you nice upside. Unfortunately, the price earnings ratio is around 30 for Mosaic, and Nutrien, and negative for Intrepid Potash.

Keep reading Investiv Daily as I will notify you when investing in fertilizers will again be a low risk high reward situation, even if it takes more than a decade to come to that. Fortunately, there will always be other investing opportunities.